TKB BNP Paribas Investment Partners in Russia is sceptical about investing in Russian companies with low price/earnings ratios for growth generation. Instead, it looks for firms that pay regular dividends to investors for stable returns—something that is not as common on the Russian market as it is in developed countries.

This approach is applied to investing in the oil sector, for example, which is already oversubscribed in Russia. CIO Vladimir Tsuprov believes it differentiates TKB BNP from other managers investing in Russian equities.

He thinks the approach is especially different in comparison to Russia-based asset managers, which rarely focus on issues such as corporate governance and management when selecting stocks.

“We are looking for stable returns, not growth spurts, so we make sure all decisions taken by our managers are based on the fundamental research conducted by our analysts,” Tsuprov said.

He explained that “unfortunately there are quite a few companies in Russia that are growing, but this growth is destroying their return on invested capital.”

The reason for this, he thinks, is ineffective management, where unnecessary spending is made on projects which do not necessarily generate earnings potential.

The government’s push to force companies to pay out dividends to investors has also not yielded sufficient results, in his view.

“Companies must now pay 25% of earnings in dividends, but this makes sense if the rest is invested in growth. If the company is not growing, then the question is what happens to the other 75%?” he questions.

One sector that is particularly affected by such inefficiency in the management process is the fully privatised gold sector. As a result, TKB BNP stays away from this sector in its equity portfolios.

A number of other sectors pose a danger for asset managers, notably metallurgy and electrical energy. The former is experiencing bad performance due to its falling competitive advantage, while the latter is subject to inefficient government reforms.

Not all sectors are lacking growth. One theme that is rapidly developing is consumer demand, which makes consumer-oriented companies attractive.